Cullen-Frost (CFR) is a conservative, Texas-based bank, with many characteristics similar to Wells-Fargo (WFC). The earliest annual report I could find on their website was 1999.

Since then,

- The bank has grown deposits at a impressive 9.3% annual rate (WFC ~ 10%)
- BVPS has grown at 10% (WFC ~ 10%).
- The average ROE is north of 14% (WFC ~ 15%)
- On average, the dividend payout ratio has been 45%, although historically this number was closer to 33% like WFC. This would explain the ROE (15%) * retention ratio (2/3) ~ BVPS growth (10%) better
- It passed the 2008-2009 crisis with flying colors

At the current market-cap of $4.3B, it is much smaller than WFC. In banking, small size may not necessarily be an advantage. Look at WFC, it is huge, but still growing profitably at a healthy clip.

## Recent Trends

I first heard about CFR through Gannon and Hoang’s blog, through these two posts. I hadn’t looked at banks before, because I found them too confusing. They are still confusing, only less so.

Since their blog post, CFR dropped by almost 40% to $45/share. This drop was precipitated by two factors.

- CFR used to sport ROE of 15-20% between 1999-2008. Since the financial crisis, the ROE has dropped to 9-10%. CFR is exposed to interest rates, and as long as they don’t rise, the ROE may be stuck in this range
- About 15% of its loans are exposed to oil prices. In Feb 2016, oil prices dropped to under $30/share. This put additional stress on the stock price.

Since then, oil prices have recovered nearly 80%, and CFR’s stock price has bounced back to nearly $70/share.

## Valuation

Like WFC, a really long term (15 years, say) holder of CFR should expect to generate returns close to the ROE. If interest rates remain depressed, this number may be high single digits to 10%. If interest rates recover, then this number may head back to over 15%.

The expected range is 10-15% total return.

### Buffett’s 10x PTI

Let us consider Buffett’s 10x PTI rule. For fiscal 2015, the PTI was nearly $320m. Subtracting the preferred dividend (~$8m), and dividing by shares outstanding (63.5m), the adjusted PTI per share was $4.91.

Multiplying by 10, this gives a share price of about $49.

Using TTM numbers instead, gives a adjusted PTI/share of $4.80, which gives almost the same value $48/share.

Thus, according to this rule, **the value is approximately $48-$49/share**.

### BV Multiple

The current BVPS (August 2016) is $48.22. This is about 10% higher the fiscal 2015 number of $44.30. For a company with a historical ROE of 14%, perhaps a P/B ratio of 1.4 is appropriate.

This would imply a fair value of 1.4 * $48 ~ **$67/share**.

If you want to use the recent ROE of closer to 10%, then you probably want to apply a P/B multiple of 1. This would give us **$48/share as the fair value.** Interestingly, this is the same as the 10x PTI rule above.

Since the onset of the current low interest environment, CFR’s P/B ratio has hovered between 1 and 2.

Based on the current BVPS, this implies a range of $48-$96, with a mid-point around $72.

Anyway you look at it, at current valuations, CFR appears to be quite fully-priced. It is a high-quality bank, there is no doubt about it. But the short-term “quick trade” money seems to have been made.

In light of this valuation, I wrote covered calls ($75 Oct 2016), on my position. The stock is currently trading at slightly under $74.